Diamond Claims & Investigation Services, Inc. - Page 25

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               income is determined to be includible in your gross                    
               income and it has not been established that such amount                
               is anything other than income to you.  Accordingly,                    
               taxable income is increased $411,086.00 for the taxable                
               year ended 9-30-88.                                                    
               On May 3, 1993, respondent filed with the Court an answer              
          (answer) to the petition that DCI had filed with the Court, in              
          which respondent alleged, inter alia, (1) that respondent mis-              
          characterized the adjustment in the notice to DCI's taxable                 
          income as an adjustment to its gross income, rather than as a               
          disallowance of a claimed deduction for contract services in the            
          amount of $411,086 and (2) that DCI is not entitled to that                 
          deduction because it constitutes a dividend or an attempted                 
          assignment of income to the Diamonds.                                       
                                       OPINION                                        
               The District Court awarded the proceeds of the Farmers                 
          lawsuit15 to the plaintiffs (viz., DCI and the Diamonds) without            

          15  The components of the proceeds of the Farmers lawsuit were:             
          (1) Lost profits damages of $1,497,016, (2) indemnity damages of            
          $63,159, (3) punitive damages of $290,715, (4) attorneys' fees              
          and costs of $226,212, and (5) interest of $177,881.  Despite the           
          District Court's awarding indemnity damages of $63,159 to all the           
          plaintiffs (viz., DCI and the Diamonds), DCI does not contend               
          that any portion of those indemnity damages is allocable to the             
          Diamonds and thus not includible in its income for the year at              
          issue.  In contrast, although a portion of the interest component           
          of the proceeds of the Farmers lawsuit was awarded with respect             
          to indemnity damages, neither petitioner nor respondent contends            
          that that portion of such interest component is not at issue.  We           
          conclude that the indemnity damages component of the proceeds of            
          the Farmers lawsuit is not at issue in this case, but that all of           
          the interest component of such proceeds is at issue.  Accord-               
          ingly, the amount of the proceeds of the Farmers lawsuit that               
          remains at issue is $2,191,824.  Hereinafter, any reference to              
                                                             (continued...)           




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